Some skepticism about infrastructure spending

Massive infrastructure projects are being sold by the administration as a way to provide jobs in the short-term and invest for the long-term economic growth of this country. With so much money being spent at once and a belief by many that the current government will make the right decisions, we are setting ourselves up for a "lost decade."

In 1990, Japan's "bubble economy" collapsed. Like our recent economic troubles, it started in real estate. Japan's case was much more extreme in degree. In the Ginza district of Tokyo, some property went for $139,000 per square foot in 1990. Japan propped up existing banks, and banks did not recognize defaulted loans. They created "zombie banks" propped up year after year by the government and pretended they were solvent.

Japan's fiscal policy was to spend on massive public works projects to keep people employed. Airports with no airliners wanting to fly there, concrete tetrapods to prevent beach erosion that actually do the opposite, roads and bridges to nowhere, and countless other projects that did not bring Japan back to prosperity.  

Creative destruction was not allowed to work in Japan. Older firms that were no longer productive were propped up by banks, and Japan's economy was frozen. To show for itself, Japan has the highest national debt as a precentage of GDP in the industrialized world, 170%.   To think that it can't happen here is to disregard the record of inefficiency and contradictions of the US government and governments in general.

Stimulus Package

"The way I see it, the first job of my administration is to put people back to work and get our economy moving again." -- Barack Obama, 1/16/09

Voters and consequently politicians have among other biases, a make-work bias. This make-work bias misses the point of a job and how the economy works.
"The Dallas Fed economist W. Michael Cox and the journalist Richard Alm illustrate this process in their 1999 book Myths of Rich and Poor, citing history’s most striking example, the drastic decline in agricultural employment: “In 1800, it took nearly 95 of every 100 Americans to feed the country. In 1900, it took 40. Today, it takes just 3.…The workers no longer needed on farms have been put to use providing new homes, furniture, clothing, computers, pharmaceuticals, appliances, medical assistance, movies, financial advice, video games, gourmet meals, and an almost dizzying array of other goods and services.”

Since I am not an anarchist, I believe there should be some government jobs and government spending. If we are looking at the government to help create or save job, we need to look ask

1. Is this an public good that will not be produced by the market? A public park or a lighthouse is the stereotypical example. There is not a practical way to restrict access to the benefits and bill for the use of a public good.
2. If government is to provide the good or service, will it be at least as efficient as contracting it out to private enterprises?
3. Does the benefit outweigh the costs? You need to count jobs as a cost not as a benefit. Labor should be counted as a cost like a machine, raw material, or land.
4. Apart from economics, is this a constitutionally allowable activity for the Federal government?

As a practical matter with this most recent stimulus package, I have a trouble believing that this money will be well-spent. I do not believe that politicians will evaluate projects properly. There is far too much emphasis on job creation. They really need to focus on the net present value complete with opportunity costs for all the inputs. With so much money being thrown at projects, how selective will they be? I suspect we will get projects of dubious economic benefit. Ethanol, synfuels, bridges to nowhere